Canada’s housing market has a 30 per cent chance of going “bust,” according to Goldman Sachs.
A research note released by the U.S.-based investment bank indicated that the country has the third-highest probability of a market crash in the G10, trailing only New Zealand (40 per cent) and Sweden (35 per cent).
The report also found that house prices in Canada were the second-most overvalued.
Goldman based its analysis on the ratio of house prices to rent, the ratio of house prices compared to household income and house prices adjusted based on inflation.
The Canadian real estate market has remained red hot, despite efforts by governments to curb speculation.
The Canadian Real Estate Association said early this week that house prices in April were up more than 10 per cent over the previous year.
The report found that the boom in the real estate market has resulted in an oversupply of new homes.
“Australia, Norway and Canada appear overbuilt,” it said.
However, the authors emphasized that this issue is not occurring across the country.
The nation’s hottest markets – namely the areas surrounding Vancouver and Toronto – have not seen construction outstrip demand, but this has occurred in Alberta and Saskatchewan where the collapse in oil prices has cooled the market.
“We would stress that in the case of Canada – a focus for many investors at the moment – there are important regional disparities to keep in mind,” the authors said.
Goldman indicated that the countries with an elevated risk of a market crash also had high levels of household debt.
And that’s certainly the case in Canada, where the ratio rose to a record-high of 167 per cent in the fourth quarter of 2016.
However, Goldman said that debt burden hasn’t gotten out of hand because of low interest rates.
“In general, we do not expect imminent problems in G10 real estate markets, but current imbalances could exacerbate cyclical weakness down the road,” said the report.